QBI Deduction Set to Expire After 2025: What Small Business Owners Should Expect in 2026

Overview

The Qualified Business Income (QBI) deduction under Section 199A has provided substantial tax savings for owners of sole proprietorships, partnerships, S corporations, and certain LLCs since its introduction in 2018. With the deduction scheduled to sunset after 2025, many small business owners may face higher taxable income and reduced after-tax profits beginning in 2026, unless new legislation extends or modifies the deduction. However, some adjustments have been made in the latest tax updates, especially regarding inflation indexing and phaseout thresholds.

What Is the QBI Deduction?

The QBI deduction (Section 199A) allows eligible business owners to deduct up to 20% of qualified business income from pass-through entities. It was designed to provide tax relief for small and mid-sized businesses, reducing overall federal tax liability, which in turn supports reinvestment, expansion, and liquidity for businesses.

The deduction was initially intended to balance the corporate tax rate reduction under TCJA and assist pass-through entities by lowering their effective tax rates.

Who Qualifies Today

Businesses structured as sole proprietorships, S corporations, partnerships, and certain LLCs may qualify. However, there are limitations based on:

• Taxable income levels

• Specified Service Trade or Business (SSTB) status

• Wage and property thresholds

Certain service-based businesses including law, accounting, health, consulting, and financial services face stricter limitations as income rises, and the QBI benefit phases out at higher income levels. Inflation adjustments have slightly raised the income thresholds for 2025.

What Happens After 2025 — QBI Deduction

• The Section 199A Qualified Business Income (QBI) deduction is now permanent.
  The deduction previously was scheduled to expire after 2025, but the new law eliminates that sunset and allows eligible taxpayers to claim the deduction in future years.

• The basic 20% pass‑through deduction remains available. Pass‑through owners (sole proprietors, partnerships, S corporations, etc.) continue to be able to deduct up to 20% of their qualified business income. 

• Some limitations and thresholds are expanded. The income range over which wage and capital limitations (and specified service trade/business (SSTB) phase‑outs) are phased in is increased, and a new $400 minimum deduction applies for taxpayers with at least $1,000 of QBI.

Updated Planning Strategies for 2026

• Normalize income across years rather than rushing it, since the 20% deduction is now permanent.
• Utilize the $400 minimum deduction for eligible active business owners with at least $1,000 in QBI, even if phase-outs would otherwise reduce the deduction.
• Leverage expanded phase-in ranges ($75,000 for single; $150,000 for joint) to retain more of the deduction before wage, capital, or SSTB limits apply.
• Use permanent 100% bonus depreciation on qualified property to reduce taxable income and help manage QBI phase-out thresholds.

These steps help maximize the permanent deduction while taking advantage of OBBBA’s broader eligibility rules.

2026 Threshold Reminder (IRS Rev. Proc. 2025-32)

• Single / Head of Household: ~$201,775

• Married Filing Jointly: ~$403,550

Impact on Service-Based Businesses

Specified service businesses (SSTBs), such as doctors, attorneys, real estate agents, and consultants have historically faced stricter limitations on the QBI deduction due to income thresholds and phase-outs. Many have structured compensation and income distribution to preserve QBI benefits. With the permanent QBI deduction under OBBBA, these businesses can now plan long-term with more certainty, though high-income SSTBs may still encounter partial phase-outs.

Planning Considerations

Even though the deduction is now permanent, business owners should continue to review:

• Entity structure: Determine whether a sole proprietorship, LLC, or S corporation remains optimal for long-term QBI benefits.

• Compensation strategies: Balance reasonable salary (which does not generate QBI) and distributions (which do) to maximize the deduction.

• Income timing: Smooth income across years to remain within favorable deduction ranges.

• Payroll and retirement contributions: Evaluate these to optimize W-2 thresholds and overall taxable income.

Multi-year projections remain valuable for understanding how changes in income, phase-outs, or other limitations may affect effective tax rates.

Conclusion

The permanent QBI deduction provides pass-through business owners with a more predictable and stable framework for long-term tax planning. SSTBs and other high-income service-based businesses should continue proactive planning to maximize benefits under the expanded phase-in ranges, $400 minimum deduction, and permanent 20% deduction. Working closely with a tax professional ensures business owners can confidently navigate the permanent QBI rules and optimize their tax position for 2026 and beyond.